Finance for Managers
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Course Introduction
Finance for Managers provides a comprehensive overview of the essential financial concepts and tools that non-financial managers need to make informed business decisions. The course covers fundamental principles such as financial statement analysis, budgeting, forecasting, and capital budgeting, along with an introduction to key topics like working capital management and risk assessment. Through practical case studies and real-world examples, students learn how to interpret financial information, evaluate business performance, and apply financial data to strategic planning and day-to-day management tasks. This course equips managers with the knowledge to collaborate effectively with finance professionals and contribute to the financial success of their organizations.
Recommended Textbook
Financial Management Theory and Practice 15th Edition by Eugene F. Brigham
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Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) Recently,Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share.Hale sold the stock to an investment banker,who in turn sold it to individual and institutional investors.This is a primary market transaction. A)True
B)False
Answer: True
Q2) If Firm A's business is to obtain savings from individuals and then invest them in financial assets issued by other firms or individuals,Firm A is a financial intermediary. A)True
B)False
Answer: True
Q3) Two disadvantages of a proprietorship are (1)the relative difficulty of raising new capital and (2)the owner's unlimited personal liability for the business' debts. A)True
B)False
Answer: True
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Chapter 2: Financial Statements, Cash Flow, and Taxes
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Q1) Which of the following statements is CORRECT?
A) Depreciation and amortization are not cash charges,so neither of them has an effect on a firm's reported profits.
B) The more depreciation a firm reports,the higher its tax bill,other things held constant.
C) People sometimes talk about the firm's net cash flow,which is shown as the lowest entry on the income statement,hence it is often called "the bottom line."
D) Depreciation reduces a firm's cash balance,so an increase in depreciation would normally lead to a reduction in the firm's net cash flow.
E) Net cash flow (NCF)is often defined as follows:
Net Cash Flow = Net Income + Depreciation and Amortization Charges.
Answer: E
Q2) The annual report contains four basic financial statements: the income statement,balance sheet,statement of cash flows,and statement of stockholders' equity. A)True
B)False
Answer: True
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Chapter 3: Analysis of Financial Statements
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Sample Questions
Q1) Harper Corp.'s sales last year were $395,000,and its year-end receivables were $42,500.Harper sells on terms that call for customers to pay 30 days after the purchase,but many delay payment beyond Day 30.On average,how many days late do customers pay? Base your answer on this equation: DSO Allowed credit period = Average days late,and use a 365-day year when calculating the DSO.
A) 7.95
B) 8.37
C) 8.81
D) 9.27
E) 9.74
Answer: D
Q2) A decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently and also that its liquidity position is improving,i.e. ,it is becoming more liquid.
A)True
B)False
Answer: False
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Chapter 4: Time Value of Money
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Sample Questions
Q1) Suppose your credit card issuer states that it charges a 15.00% nominal annual rate,but you must make monthly payments,which amounts to monthly compounding.What is the effective annual rate?
A) 15.27%
B) 16.08%
C) 16.88%
D) 17.72%
E) 18.61%
Q2) What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?
A) $8,509
B) $8,957
C) $9,428
D) $9,924
E) $10,446
Q3) A time line is meaningful even if all cash flows do not occur annually.
A)True
B)False
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Chapter 5: Bonds, Bond Valuation, and Interest Rates
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Q1) An 8-year Treasury bond has a 10% coupon,and a 10-year Treasury bond has an 8% coupon.Both bonds have the same yield to maturity.If the yield to maturity of both bonds increases by the same amount,which of the following statements would be CORRECT?
A) Both bonds would decline in price,but the 10-year bond would have the greater percentage decline in price.
B) The prices of both bonds would increase by the same amount.
C) One bond's price would increase,while the other bond's price would decrease.
D) The prices of the two bonds would remain constant.
E) The prices of both bonds will decrease by the same amount.
Q2) One year ago Lerner and Luckmann Co.issued 15-year,noncallable,7.5% annual coupon bonds at their par value of $1,000.Today,the market interest rate on these bonds is 5.5%.What is the current price of the bonds,given that they now have 14 years to maturity?
A) $1,077.01
B) $1,104.62
C) $1,132.95
D) $1,162.00
E) $1,191.79
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Page 7
Chapter 6: Risk and Return
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Q1) Suppose that during the coming year,the risk free rate,r<sub>RF</sub>,is expected to remain the same,while the market risk premium (r<sub>M</sub> r<sub>RF</sub>),is expected to fall.Given this forecast,which of the following statements is CORRECT?
A) The required return on all stocks will remain unchanged.
B) The required return will fall for all stocks,but it will fall more for stocks with higher betas.
C) The required return for all stocks will fall by the same amount.
D) The required return will fall for all stocks,but it will fall less for stocks with higher betas.
E) The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0.
Q2) Even if the correlation between the returns on two securities is +1.0,if the securities are combined in the correct proportions,the resulting 2-asset portfolio will have less risk than either security held alone.
A)True
B)False
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Chapter 7: Corporate Valuation and Stock Valuation
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Q1) Which of the following statements is CORRECT?
A) Preferred stock is normally expected to provide steadier,more reliable income to investors than the same firm's common stock,and,as a result,the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock.
B) The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis)new issues of preferred stock.
C) One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient,whereas interest income earned on bonds would be tax free.
D) One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer.
E) A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights.
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Chapter 8: Financial Options and Applications in Corporate Finance
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Q1) Because of the time value of money,the longer before an option expires,the less valuable the option will be,other things held constant.
A)True
B)False
Q2) The exercise value is also called the strike price,but this term is generally used when discussing convertibles rather than financial options.
A)True
B)False
Q3) As the price of a stock rises above the strike price,the value investors are willing to pay for a call option increases because both (1)the immediate capital gain that can be realized by exercising the option and (2)the likely exercise value of the option when it expires have both increased.
A)True
B)False
Q4) An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time.
A)True
B)False
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Chapter 9: The Cost of Capital
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Q1) When estimating the cost of equity by use of the bond-yield-plus-risk-premium method,we can generally get a good idea of the interest rate on new long-term debt,but we cannot be sure that the risk premium we add is appropriate.This problem leaves us unsure of the true value of r<sub>s</sub>.
A)True
B)False
Q2) A company's perpetual preferred stock currently sells for $92.50 per share,and it pays an $8.00 annual dividend.If the company were to sell a new preferred issue,it would incur a flotation cost of 5.00% of the issue price.What is the firm's cost of preferred stock?
A) 7.81%
B) 8.22%
C) 8.65%
D) 9.10%
E) 9.56%
Q3) The lower the firm's tax rate,the lower will be its after-tax cost of debt and also its WACC,other things held constant.
A)True
B)False
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11
Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Q1) Suppose a firm relies exclusively on the payback method when making capital budgeting decisions,and it sets a 4-year payback regardless of economic conditions.Other things held constant,which of the following statements is most likely to be true?
A) It will accept too many long-term projects and reject too many short-term projects (as judged by the NPV).
B) The firm will accept too many projects in all economic states because a 4-year payback is too low.
C) The firm will accept too few projects in all economic states because a 4-year payback is too high.
D) If the 4-year payback results in accepting just the right set of projects under average economic conditions,then this payback will result in too few long-term projects when the economy is weak.
E) It will accept too many short-term projects and reject too many long-term projects (as judged by the NPV).
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Chapter 11: Cash Flow Estimation and Risk Analysis
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Q1) Superior analytical techniques,such as NPV,used in combination with risk-adjusted cost of capital estimates,can overcome the problem of poor cash flow estimation and lead to generally correct accept/reject decisions.
A)True
B)False
Q2) Which of the following statements is CORRECT?
A) One advantage of sensitivity analysis relative to scenario analysis is that it explicitly takes into account the probability of specific effects occurring,whereas scenario analysis cannot account for probabilities.
B) Well-diversified stockholders do not need to consider market risk when determining required rates of return.
C) Market risk is important,but it does not have a direct effect on stock prices because it only affects beta.
D) Simulation analysis is a computerized version of scenario analysis where input variables are selected randomly on the basis of their probability distributions.
E) Sensitivity analysis is a good way to measure market risk because it explicitly takes into account diversification effects.
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Chapter 12: Financial Planning and Applications to Corporate Valuation
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Q1) The capital intensity ratio is the amount of assets required per dollar of sales and it has a major impact on a firm's capital requirements.
A)True
B)False
Q2) A rapid build-up of inventories normally requires additional financing,unless the increase is matched by an equally large decrease in some other asset.
A)True
B)False
Q3) The capital intensity ratio is generally defined as follows:
A) The percentage of liabilities that increase spontaneously as a percentage of sales.
B) The ratio of sales to current assets.
C) The ratio of current assets to sales.
D) The amount of assets required per dollar of sales,or A<sub>0</sub>*/S<sub>0</sub>.
E) Sales divided by total assets,i.e. ,the total assets turnover ratio.
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14
Chapter 13: Corporate Governance
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Q1) Two important issues in corporate governance are (1)the rules that cover the board's ability to fire the CEO and (2)the rules that cover the CEO's ability to remove members of the board.
A)True
B)False
Q2) Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
A) To enable the firm to borrow at a below-market interest rate.
B) To make it easier to grant stock options to employees.
C) To help prevent a hostile takeover.
D) To help retain valued employees.
E) To increase worker productivity.
Q3) ESOPs were originally designed to help improve worker productivity,but today they are also used to help prevent hostile takeovers.
A)True
B)False
Q4) A poison pill is also known as a corporate restructuring.
A)True
B)False
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Chapter 14: Distributions to Shareholders: Dividends and Repurchases
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Q1) Which of the following actions will best enable a company to raise additional equity capital?
A) Declare a stock split.
B) Begin an open-market purchase dividend reinvestment plan.
C) Initiate a stock repurchase program.
D) Begin a new-stock dividend reinvestment plan.
E) Refund long-term debt with lower cost short-term debt.
Q2) Getler Inc.'s projected capital budget is $2,000,000,its target capital structure is 40% debt and 60% equity,and its forecasted net income is $1,000,000.If the company follows a residual dividend policy,how much dividends will it pay or,alternatively,how much new stock must it issue?
Dividends Stock Issued
A) $514,425 $162,901
B) $541,500 $171,475
C) $570,000 $180,500
D) $600,000 $190,000
E) $ 0 $200,000
Q3) A reverse split reduces the number of shares outstanding.
A)True
B)False
Page 16
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Chapter 15: Capital Structure Decisions
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Q1) Cartwright Communications is considering making a change to its capital structure to reduce its cost of capital and increase firm value.Right now,Cartwright has a capital structure that consists of 20% debt and 80% equity,based on market values.(Its D/S ratio is 0.25. )The risk-free rate is 6% and the market risk premium,r<sub>M</sub> r<sub>RF</sub>,is 5%.Currently the company's cost of equity,which is based on the CAPM,is 12% and its tax rate is 40%.What would be Cartwright's estimated cost of equity if it were to change its capital structure to 50% debt and 50% equity?
A) 13.00%
B) 13.64%
C) 14.35%
D) 14.72%
E) 15.60%
Q2) Different borrowers have different risks of bankruptcy,and bankruptcy is costly to lenders.Therefore,lenders charge higher rates to borrowers judged to be more at risk of going bankrupt.
A)True
B)False
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Chapter 16: Supply Chains and Working Capital Management
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Q1) Determining a firm's optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.
A)True
B)False
Q2) A conservative current operating asset financing approach will result in permanent current assets and some seasonal current assets being financed using long-term securities.
A)True
B)False
Q3) The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt.Added risk stems from (1)the greater variability of interest costs on short-term than long-term debt and (2)the fact that even if its long-term prospects are good,the firm's lenders may not be willing to renew short-term loans if the firm is temporarily unable to repay those loans.
A)True
B)False
Q4) The aging schedule is a commonly used method for monitoring receivables.
A)True
B)False
Page 18
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Chapter 17: Multinational Financial Management
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Q1) Suppose 6 months ago a Swiss investor bought a 6-month U.S.Treasury bill at a price of $9,708.74,with a maturity value of $10,000.The exchange rate at that time was 1.420 Swiss francs per dollar.Today,at maturity,the exchange rate is 1.324 Swiss francs per dollar.What is the annualized rate of return to the Swiss investor?
A) 7.92%
B) 4.13%
C) 6.00%
D) 8.25%
E) 12.00%
Q2) Credit policy for multinational firms is generally more risky due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.
A)True
B)False
Q3) When considering the risk of a foreign investment,a higher risk might arise from exchange rate risk and political risk while lower risk might result from international diversification.
A)True
B)False
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Page 19
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Q1) Which of the following statements is most CORRECT?
A) Private placements occur most frequently with stocks,but bonds can also be sold in a private placement.
B) Private placements are convenient for issuers,but the convenience is offset by higher flotation costs.
C) The SEC requires that all private placements be handled by a registered investment banker.
D) Private placements can generally bring in funds faster than is the case with public offerings.
E) In a private placement,securities are sold to private (individual)investors rather than to institutions.
Q2) If the firm uses the after-tax cost of new debt as the discount rate when analyzing a refunding decision,and if the NPV of refunding is positive,then the value of the firm will be maximized if it immediately calls the outstanding debt and replaces it with an issue that has a lower coupon rate.
A)True
B)False
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Page 20
Chapter 19: Lease Financing
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Q1) Operating leases help to shift the risk of obsolescence from the user to the lessor.
A)True
B)False
Q2) A synthetic lease is a combination of derivative securities and asset purchases that mimic the cash flows of an operating lease.
A)True
B)False
Q3) The full amount of a lease payment is tax deductible provided the contract qualifies as a true lease under IRS guidelines.
A)True
B)False
Q4) In a synthetic lease a special purpose entity (SPE)is set up by a corporation that wants to acquire the use of an asset.The SPE borrows up to 97% of its capital,uses its funds to buy the asset,and then leases it to the sponsoring corporation on a short-term basis.This keeps both the asset and the debt off the sponsoring company's books.
A)True
B)False
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21
Chapter 20: Hybrid Financing: Preferred Stock, Warrants, and Convertibles
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Q1) Firms generally do not call their convertibles unless the conversion value is greater than the call price.
A)True
B)False
Q2) Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price,which is desirable for liquidity portfolios,and they also benefit from the 70% tax exemption on preferred dividends received.
A)True
B)False
Q3) The problem of dilution of stockholders' earnings never results from the sale of call options,but it can arise if warrants are used.
A)True
B)False
Q4) Preferred stock can provide a financing alternative for some firms when market conditions are such that they cannot issue either pure debt or common stock at any reasonable cost.
A)True
B)False
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Chapter 21: Dynamic Capital Structures and Corporate Valuation
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Q1) Which of the following statements concerning the compressed adjusted present value (APV)model is NOT CORRECT?
A) The value of a growing tax shield is greater than the value of a constant tax shield.
B) For a given D/S,the levered cost of equity using the compressed APV model is greater than the levered cost of equity under MM's original (with tax)assumptions.
C) For a given D/S,the WACC in the compressed APV model is less than the WACC under MM's original (with tax)assumptions.
D) The total value of the firm increases with the amount of debt.
E) The tax shields should be discounted at the unlevered cost of equity.
Q2) If the capital structure is stable,and free cash flows are expected to be growing at a constant rate at the horizon date,then the compressed adjusted present value model calculates the horizon value by discounting the post-horizon free cash flows and post-horizon expected future tax shields at the weighted average cost of capital.
A)True
B)False
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Page 23
Chapter 22: Mergers and Corporate Control
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Q1) Firms use defensive tactics to fight off undesired mergers.These tactics do not include
A) getting a white squire to purchase stock in the firm.
B) getting white knights to bid for the firm.
C) repurchasing their own stock.
D) changing the bylaws to eliminate supermajority voting requirements.
E) raising antitrust issues.
Q2) A joint venture is one in which two,or sometimes more,independent companies agree to combine resources in order to achieve a specific objective,usually limited in scope.
A)True
B)False
Q3) The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.
A)True
B)False
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Chapter 23: Enterprise Risk Management
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Q1) Which of the following are NOT ways risk management can be used to increase the value of a firm?
A) Risk management can help a firm maintain its optimal capital budget.
B) Risk management can reduce the expected costs of financial distress.
C) Risk management can help firms minimize taxes.
D) Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.
E) Risk management can increase debt capacity.
Q2) Suppose the December CBOT Treasury bond futures contract has a quoted price of 80'07.What is the implied annual interest rate inherent in the futures contract?
A) 6.86%
B) 7.22%
C) 7.60%
D) 8.00%
E) 8.40%
Q3) One objective of risk management can be to reduce the volatility of a firm's cash flows.
A)True
B)False
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Page 25
Chapter 24: Bankruptcy, Reorganization, and Liquidation
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Q1) Even if a firm's cash flow projections indicate that it will soon be unable to meet its interest payments,a bankruptcy case cannot begin until the firm actually defaults on a scheduled payment.
A)True
B)False
Q2) Chapter 7 of the Bankruptcy Act is designed to do which of the following?
A) Establish the rules of reorganization for firms with projected cash flows that eventually will be sufficient to meet debt payments.
B) Ensure that the firm is viable after emerging from bankruptcy.
C) Allow the firm to negotiate with each creditor individually.
D) Provide safeguards against the withdrawal of assets by the owners of the bankrupt firm and allow insolvent debtors to discharge all of their obligations and to start over unhampered by a burden of prior debt.
E) Protect shareholders against creditors.
Q3) The primary test of feasibility in a reorganization is whether the firm's fixed charges after reorganization can be covered by its projected cash flows.
A)True
B)False
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26
Chapter 25: Portfolio Theory and Asset Pricing Models
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Q1) Suppose that (1)investors expect a 4.0% rate of inflation in the future, (2)the real risk-free rate is 3.0%, (3)the market risk premium is 5.0%, (4)Talcott Inc.'s beta is 1.00,and (5)its realized rate of return has averaged 15.0% over the last 5 years.Calculate the required rate of return for Talcot Inc.
A) 10.29%
B) 10.83%
C) 11.40%
D) 12.00%
E) 12.60%
Q2) Stock A's beta is 1.5 and Stock B's beta is 0.5.Which of the following statements must be true about these securities? (Assume market equilibrium. )
A) Stock B must be a more desirable addition to a portfolio than Stock A.
B) Stock A must be a more desirable addition to a portfolio than Stock B.
C) The expected return on Stock A should be greater than that on Stock B.
D) The expected return on Stock B should be greater than that on Stock A.
E) When held in isolation,Stock A has greater risk than Stock B.
Q3) The slope of the SML is determined by the value of beta.
A)True
B)False
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Chapter 26: Real Options
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Q1) Real options are most valuable when the underlying source of risk is very low.
A)True
B)False
Q2) Refer to data for Steppingstone Incorporated (SI).Now assume that one year from now SI will know if the Z 45 has become the industry standard.Also assume that after receiving the cash flows at t = 1,SI has the option to abandon the project,in which case it will receive an additional $100,000 at t = 1 but no cash flows after t = 1.Assuming that the cost of capital remains at 12%,what is the estimated value of the abandonment option?
A) $0
B) $2,075
C) $4,067
D) $8,945
E) $10,745
Q3) Which of the following is NOT a real option?
A) The option to buy shares of stock if its price goes up.
B) The option to expand into a new geographic region.
C) The option to abandon a project.
D) The option to switch the type of fuel used in an industrial furnace.
E) The option to expand production if the product is successful.
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Page 28
Chapter 27: Providing and Obtaining Credit
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Q1) The collection process,although sometimes difficult,is also expensive in terms of out-of-pocket expenses.
A)True
B)False
Q2) The uncollected balances schedule is constructed at the end of a quarter by dividing the dollar amount of remaining receivables from each month in that quarter by that month's sales.
A)True
B)False
Q3) Refer to Exhibit 27.2.What would be the incremental bad losses if the change were made?
A) $315,000
B) $260,500
C) $260,500 (bad debt losses would decline)
D) $315,000 (Bad debt losses would decline)
E) $0 (no change would occur)
Q4) The credit period is the amount of time it takes to do a credit search on a potential customer.
A)True
B)False
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Chapter 28: Advanced Issues in Cash Management and Inventory Control
Available Study Resources on Quizplus for this Chatper
29 Verified Questions
29 Flashcards
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Sample Questions
Q1) Humphrey's Housing has been practicing cash management for some time by using the Baumol model for determining cash balances.Some time ago,the model called for an average balance (C*/2)of $500;at that time,the rate on marketable securities was 4 percent.A rapid increase in interest rates has driven the interest rate up to 9 percent.What is the appropriate average cash balance now?
A) $200
B) $333
C) $414
D) $500
E) $666
Q2) Refer to Exhibit 28.1.According to the Baumol model,what should be Duckett's average cash balance?
A) $35,356
B) $3,536
C) $22,157
D) $70,711
E) $42,918
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Chapter 29: Pension Plan Management
Available Study Resources on Quizplus for this Chatper 10 Verified Questions 10 Flashcards
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Sample Questions
Q1) Arnold Rossiter is a 40-year-old employee of the Barrington Company who will retire at age 60 and expects to live to age 75.The firm has promised a retirement income of $20,000 at the end of each year following retirement until death.The firm's pension fund is expected to earn 7 percent annually on its assets and the firm uses 7% to discount pension benefits.What is Barrington's annual pension contribution to the nearest dollar for Mr.Rossiter? (Assume certainty and end-of-year cash flows. )
A) $2,756
B) $3,642
C) $4,443
D) $4,967
E) $5,491
Q2) The performance measurement of stock portfolio managers must recognize the risk inherent in the investment portfolio.One way to incorporate risk into performance measurement is to examine the portfolio's alpha,which measures the vertical distance of the portfolio's return above or below the Security Market Line.
A)True
B)False
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Source URL: https://quizplus.com/quiz/65480
Sample Questions
Q1) Since not-for-profit firms do not pay taxes,they receive no tax benefits whatsoever from using debt financing.
A)True
B)False
Q2) Not-for-profit firms have fund capital in place of equity capital.Since fund capital does not have to provide a return to stockholders,the appropriate cost of fund capital in a cost of capital estimate is zero.
A)True
B)False
Q3) Which of the following statements about a not-for-profit firm's sources of capital is most correct?
A) Fund capital is obtained by retaining earnings if all earnings are paid out as dividends,no fund capital is created.
B) Preferred stock is never used by not-for-profit firms.
C) Not-for-profit firms are not allowed to raise capital by borrowing.
D) Not-for-profit firms usually have high dividend payouts.
E) Since not-for-profit firms are tax exempt,there is no tax advantage to debt capital.
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